There's Reason For Concern Over Silgo Retail Limited's (NSE:SILGO) Massive 31% Price Jump

The Silgo Retail Limited (NSE:SILGO) share price has done very well over the last month, posting an excellent gain of 31%. The annual gain comes to 122% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Silgo Retail may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 29.7x, since almost half of all companies in India have P/E ratios under 25x and even P/E's lower than 14x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

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With earnings growth that's exceedingly strong of late, Silgo Retail has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Silgo Retail

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Silgo Retail will help you shine a light on its historical performance.

How Is Silgo Retail's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Silgo Retail's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 65% last year. Pleasingly, EPS has also lifted 32% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 25% shows it's noticeably less attractive on an annualised basis.

With this information, we find it concerning that Silgo Retail is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On Silgo Retail's P/E

Silgo Retail's P/E is getting right up there since its shares have risen strongly. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Silgo Retail revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Silgo Retail (1 doesn't sit too well with us!) that you need to be mindful of.

If you're unsure about the strength of Silgo Retail's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.